FXStreet (Guatemala) – Analysts at Rabobank noted and explained that the Eurozone’s current reflationary story can be traced back to mid-February when German economic data started to consistently surprise on the upside.
Key Quotes:
“The German recovery appears to be well entrenched with consumer confidence, retail sales and factory orders performing well. Other economies within the Eurozone have also been showing improved economic performances. Part of the better tone in the Eurozone economy has stemmed from the drop in oil prices and the improvement of the export performance noted in some countries has been facilitated by the softer tone of the EUR.”
“However, a drop in wage costs in the periphery following the crisis and a very slow pace of wage increases since then has been another factor behind the improved competiveness of countries such as Ireland and Spain.”
“While lower wages are leading to more jobs, in Spain the unemployment rate remains stubbornly high at around 24%. The combination of high unemployment and low wage growth is most likely a key reason why protest political parties, including the far left, performed well in the recent Spanish local elections.”
“The risk that this performance may be repeated at the end of year in the national elections suggests that structural reform, which is often painful for some time before if bears fruit, may not be at the top of the government’s agenda in the coming months. Without more structural reform in the region’s largest economies such as Spain, France and Italy there is risk that the Eurozone economy could continue to perform below potential for a prolonged period. This argues for continued monetary policy stimulus.”
“The fact that the recent uptick in Eurozone inflation is being led by higher input costs which could eat into consumers’ incomes rather than stronger demand is another reason for the ECB to maintain its commitment to QE. We expect Bund yields to be pressured lower in the coming months under the weight of the asset purchase programme and that this will in turn weigh on the EUR in the second half of the year.”
We expect EUR/USD will moves towards 1.08 on a 3 month before edging lower ahead of the December FOMC.”
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